Maybe you became a freelancer because you wanted to set your own schedule, leave the monotony of nine-to-five, and even work from the beach now and then. Freelancing can be a great lifestyle, but one of the hardest things about being a freelancer is there’s no one around to tell you if you’re doing things right.
The first year of freelancing can be the toughest. You discover that your success and solvency hinge on so much more than just your core “billable” skills (e.g. coding, writing, design). You have handle all the legal odds and ends, as well as taxes — which can be a freelancer’s nightmare the first time around. There’s also account management, bookkeeping, business development, and the list continues.
If you really want to thrive as a freelancer, you need to evolve into a business owner. This might be easier said than done, but here are five things that you can do to take control of your freelancing business and make it work for you.
Pick a company structure
Most freelancers will need to decide between becoming a sole proprietor, Limited Liability Company (LLC) or Corporation. When people first start out and aren’t earning a lot, they tend to just stick with the default option of sole proprietor. This might work at the beginning, but eventually many freelancers will outgrow the sole proprietorship.
For example, as you start taking on larger firms as clients, you might discover that these large companies don’t want to work with sole proprietors. This means that you’ll either need to turn down the gig or change your business structure. In addition, there’s a very serious matter of liability. As a sole proprietor, you are the business. If your business is sued or loses money, then your personal assets are on the hook. When you form an LLC or corporation, this structure puts a shield between you and the business, helping protect your personal assets from things that happen in the business.
It may seem strange to create a formal structure when you’re the only one involved. After all, as a corporation, you need to call a formal meeting with yourself before making any major decision. For this reason, the LLC is very popular among small and solo business owners since it limits personal liability, while also keeping the paperwork and administrative requirements to a minimum. In addition, LLCs and corporations can give you some flexibility to lower your self-employment taxes; you can discuss these options with an accountant or tax advisor.
Get your pricing right
Nothing impacts your bottom line more than how much you charge. The most common freelancing pitfall is undercutting prices. You might do this at first to attract new clients. But, then here’s what happens…more business comes in and your clients all love you; yet it seems like you need to work harder and harder just to stay afloat.
Running a business means charging the money you deserve for the value you bring to customers. Lowball prices tell clients that your talents are worth less than others out there. Think of is this way: what quality do you expect from a $7 bottle of wine versus a $60 one?
If you’re good at what you do, then be confident to raise your rates (even just slightly) with each new project or client. Someone once told me “If you set your prices once, they’re probably wrong.” In addition, raising your prices can reshape your business. You end up working with better clients – those people who appreciate good work and understand the value of investing in higher priced, higher value solutions.
Don’t slack on the admin
When you’re hustling for new business and juggling a zillion client needs, it’s very easy to put off administrative tasks for another day ‘after things have quieted down.’ However, as a business owner/freelancer, things rarely ever quiet down. This means you need to dedicate time every week to take care of your business, and not just your clients.
If you invoice at the end of a project, be sure to send off that invoice as soon as the project wraps up…don’t wait a week or two. Or, bill on a set schedule, whether that’s weekly, bi-weekly, or monthly. Invoicing as frequently as possible will improve your cash flow and help prevent the ‘feast or famine’ stress that’s so common with freelancers. Most importantly, set aside an hour every Friday (or whatever day works for you) to keep your accounts up to date: enter/manage your business receipts, chase down any unpaid bills, etc.
Pay yourself, your business, and the taxman
One of the most important things you can do as a freelancer is to start separating your business and personal income. If you formed an LLC or corporation, this step is mandatory, but it’s a smart idea for sole proprietors too.
Ideally, you should be dividing your business income into four general buckets:
Your business: Pay for business-related expenses and make any investments to grow
Your business taxes: Set aside a percentage of each client payment in a dedicated tax account so you’ve got money ready come tax time. It’s a similar concept to how an employer withholds a chunk for federal/state taxes with every paycheck – but as a freelancer, you’re now the ‘employer.’ Also, keep in mind that as a business, you should now be making quarterly payments to the IRS.
Personal savings/retirement: If you plan on freelancing for the long haul, you need a real solution for your retirement and other savings.
Personal checking: To pay for all your living expenses, etc.
You can work with a financial planner/CPA to determine the best allocation. For example, some freelancers may divide this up by 15% business, 15-20% taxes, 15% savings, and the rest for living expenses. The nice thing about freelancing is you have the flexibility to adjust these numbers as needed, but try to stay as disciplined as possible with setting money aside for your taxes and retirement.
Focus on your own goals
Clients are like monsters that will eat up every available minute if you let them. You may have entered into freelancing to have more control of your career and happiness, but you end up so buried taking care of each and every client demand that it can be hard to feel in control of anything.
As a freelancer, it’s essential to set your own boundaries with your time and projects. You should regularly be asking yourself two questions: “Why do I freelance?” and “Where do I want to be a year from now?” Then, you’ll need to choose your jobs and clients accordingly. For example, you may have started freelancing because you want more free time to spend with your family or another passion. Do your current projects offer you that flexibility?
Get into the habit of reflecting on your business goals every quarter and assess what areas could be improved. Keep your goals in mind when deciding on new projects/clients. You’ll be a happier and more successful freelancer for it.
Credit: Photo courtesy of Nellie Akalp
Nellie Akalp is an entrepreneur, business expert, speaker, author, wife and mother to four. Her first business was started with $100 and sold eight years later for $20 million. Today she is the founder & CEO of CorpNet.com, an online legal document filing service, where she helps entrepreneurs incorporate, form LLCs, file DBAs and keep their businesses in compliance. Nellie has been named a Top 100 Small Business Influencer by Small Business Trends the last five years and CorpNet.com has been recognized on the Inc. 5000 list of fastest-growing privately-held companies in America in 2015 and 2016.